Restaurant stocks are the talk of the Street in light of Panera Bread's takeover by JAB Holdings, so Jim Cramer turned to two food chains to illustrate the winners and losers of the casual dining market.
Both Darden Restaurants, the parent of Olive Garden, and Brinker International, the Chili's parent, rallied almost hand-in-hand in the second half of 2016. Once 2017 hit, however, their stocks went separate ways, with Darden rising almost 15 percent and Brinker sliding 14 percent year-to-date.
"On the surface, the two companies would seem to have a lot in common," the "Mad Money" host acknowledged.
They are comparable in scale: Brinker has 1,600 restaurants around the globe while Darden has 1,500, and both own smaller brands alongside their trademark restaurants.
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But once the market started worrying about the wherewithal of restaurants to survive in the stay-at-home economy and Brinker tanked, their stories started to look markedly different.
"Brinker is pretty much the baseline here," Cramer said. "Its performance has essentially been in-line with the rest of the industry, which is why Wall Street's quickly turned so negative on the stock."
The Chili's parent suffered a big earnings miss, declining same-store sales, slashed full-year guidance, and bad press on Veterans Day when one veteran was denied a promotional free meal at Chili's.
"The company reports again in three weeks. Can't be super optimistic," Cramer said.
Meanwhile, Darden reported a strong quarter at the end of March that included a bump up in same-store sales, improved 2017 earnings guidance, and a new acquisition of Cheddar's Scratch Kitchen. Management was also upbeat about Darden's to-go business, which was up 17 percent.
"Here's the thing you need to understand: Darden's turn has literally been years in the making," Cramer said.
It started with their sale of Red Lobster, followed by major changes in management spurred by activist fund Starboard Value in 2014, and ending with traffic-boosting store remodeling and a growing to-go business.
"Compare that to Brinker, where they've got the same old management team and the same old tired stores," Cramer said. "Neither company has particularly healthy food, but Darden's brands are certainly perceived as being healthier than Chili's — the unlimited salad bowl which I love so much, it's better than the baby back ribs for you."
Darden may seem expensive at 19 times earnings, but Cramer gave it a pass because it is one of the few restaurant chains with proof of growth.
The bottom line? "It's very tough to invest in the restaurant industry right now, but that's why it's so important to remember why it's worth paying up for best of breed stocks like Darden, rather than going bargain hunting for companies that seem to be struggling like Brinker," Cramer said.
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